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FRM Part I · FRM Exam Part I · Modeling Non-Parallel Term Structure Shifts and Hedging

A $20 million portfolio has key rate durations of 0.5 at the 2-year, 2.0 at the 5-year and 3.5 at the 10-year points. The 2-year key rate rises 4 bp, the 5-year key rate rises 10 bp and the 10-year key rate falls 6 bp. Using key rate durations, what is the approximate change in portfolio value?

The value falls by about $2,000. Weighted key rate shifts total 0.0002 + 0.0020 - 0.0021 = 0.0001, and multiplying by -$20 million gives -$2,000. The 10-year rate decline offsets almost all of the loss from the 2- and 5-year increases.

  1. A+$2,000
  2. B-$44,000
  3. C-$84,000
  4. D-$2,000Correct

Explanation

Sum of KRD × shift = 0.5(0.0004) + 2.0(0.0010) + 3.5(-0.0006) = 0.0002 + 0.0020 - 0.0021 = 0.0001. Change in value = -20,000,000 × 0.0001 = -$2,000. Omitting the 10-year fall gives -$44,000, and treating it as a rise gives -$84,000.

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